There have been a lot of posts about debt on this blog and the chart comparing government and household debt, which appeared in two of those debt posts, has proved particularly popular in discussion forums focusing on Australian property prices. Since producing the chart, the Australian government stimulus spending has continued to work its way through the economy and has been pushing up the levels of government debt. While I would still argue, as I have done many times before, that we should not follow the likes of Barnaby Joyce in getting agitated about public debt, it does seem worth updating the chart to illustrate recent developments. The regions shaded red denote Labor party governments in power.
Australian Government and Household Debt (1976-2010)
As expected, government debt levels exhibit a marked up-swing (note that the government data includes Treasury projections to the end of the current financial year). What is striking, however, is that the levels of household debt have not yet fallen. While some of the weakness in the economies of countries like the US and the UK is attributed to consumers “deleveraging” (a fancy term for paying down debt rather than buying flat-screen televisions), Australian households are showing no signs yet of reducing their debt. And 90% of that debt is for housing.
While it may not be evident here, there is in fact a tight relationship between debt levels in different sectors of the economy. If I spend money then either I reduce my financial assets (drawing on my savings) or I increase my liabilities (borrow on my credit card or some other form of debt). Exactly the reverse is true of whomever I give my money to (let’s call them Joe for argument’s sake): Joe’s assets go up or his liabilities go down. Spending money is an example of a “zero sum game”. If I add the change to my net worth (assets minus liabilities) to the change of Joe’s net worth it adds to zero. My negative change offsets Joe’s positive change. Aggregating over the whole economy, the sum is still zero.
Now consider what happens if we divide the economy’s net financial worth into that of the government sector, the private sector and the foreign sector (which includes overseas governments). Any changes in net worth across all three have to add to zero. As a result, the change in the government position is the opposite of the change in the private sector and international positions combined. If the government debt is going up, debt must be going down somewhere else. Now we know the household sector is not reducing debt, but what if we look at the private sector overall, including businesses? A different picture emerges.
Australian Government and Private Sector Debt (1976-2010)
Taken as a whole, over the 12 months to the end of 2009, private sector debt fell by about 2.5% of GDP. This was almost as much as government sector debt rose (about 3% of GDP). The difference can be explained both by the role of the foreign sector as well as slight differences in data collection methods across different sectors. Keep in mind that chart includes the government debt projections out to June 2010, while the private sector debt data only extends to the end of January 2010.
Since household debt has continued to increase, what this means is that Australian businesses have in fact been reducing debt significantly. The reduction in non-household private sector debt over 2009 was almost 7% of GDP. Businesses appear far more concerned about their debt levels than home-buyers do. It will be very interesting to see what happens once the first time home buyers scheme is fully unwound.
Data sources:
Government debt to 2008: A history of public debt in Australia
Government debt for 2009: Reserve Bank of Australia – Series E10
Government debt for 2010: Australian Treasury – Budget Estimate
Private sector debt: Reserve Bank of Australia – Series D2
Gross Domestic Product: Australian Bureau of Statistics – Series 5206.0
Possibly Related Posts (automatically generated):
- Park the Debt Truck! (16 July 2009)
- Infrastructure Bonds (17 August 2010)
- Why deficits are bad (2 June 2011)
- Come Back Keynes, All Is Forgiven! (16 October 2008)
{ 10 comments… read them below or add one }
The reduction in non-household private sector debt is certainly spectacular, but it isn’t driven only by the rise in Government debt. Businesses were forced by market conditions to cut debt (not least because the freezing of credit markets meant they could not roll debt forward).
Also, the household sector could well be just as concerned about their debt levels, but selling a house to pay off a mortgage is harder than raising equity or selling off brands to refinance loans. The household sector is likely to take longer to show a response than businesses. Perhaps focussing on faster elements of household debt (say credit cards) would provide more convincing evidence than overall debt does.
Exactly how does the household sector reduce it’s debt en masse when 90% of it is mortgage debt?
Wouldn’t house prices have to go on a sustained downslide first?
Or a wave of mass bankruptcies?
90% of the household sector’s debt is of the kind that you can’t simply pay down or reduce or just walk away from as borrowers could in the US.
It makes sense to me that unless house prices take a significant and sustained fall or we experience a a recession that creates an unemployment rate similar to what we see overseas, the household sector is going to have trouble making any great reduction in it’s debt.
Mark: you are certainly right that large businesses have far more capacity to reduce debt by raising equity and/or reducing dividend payments. It’s much harder for small businesses, but the size of large companies is such that they can have a big impact on the figures. It will be interesting to watch the household debt figures over the next one or two years.
Lefty: I certainly agree that it’s hard for mortgage debt to reduce rapidly, but I wouldn’t agree that the only way it can go down it for a sustained decline in prices. For a start, that in itself will not reduce debt and in fact may encourage bargain-hunters to come into the market, taking out new debt. Of course, if people then run into problem servicing their debt the bank may foreclose on them and sell their house and write off any shortfall. But it’s not house price falls themselves that lead to foreclosures, it’s borrowers’ inability to service their debt. Common causes of this are rising interest rates (which we are seeing) and rising unemployment (which we are not). The one way falling prices can trigger significant foreclosures, as we say in the US from 2007, is if there are a lot of borrowers drastically over-extending themselves on their debt in the hope that they will “flip” the property (sell it at a higher price) before having to service higher interest rates. My sense is that there has been far less of this sort of speculative buying in Australia than there was in the US up to 2006 and certainly the levels of “sub-prime” borrowing have always been lower here and have fallen further still over the last couple of years.
The ABS Housing Finance figures show that, although down somewhat from mid-2009, new more debt is still being added at quite a rate. A big reduction in aggregate mortgage debt would require a significant slowdown in new debt as well as reduction of existing debt.
Hi Sean.
“A big reduction in aggregate mortgage debt would require a significant slowdown in new debt as well as reduction of existing debt.”
This is what I was alluding to. If there is a significant and sustained fall in house prices then new entrants into the market will not require the same amount of debt to purchase. Might this not lead to a (steady) deleveraging of the overall sector over time as the value of new debt commitments falls (hypothetically – obviously there are many other possible factors that could be considered)?
Stubborn,
Please, understand that I am writing as a Marxist. As I see things, and against popular perception (even among economists!), one of the central ideas of neoclassical economics is that there are such things as free lunches.
That’s why I find it refreshing when someone mentions “zero-sum games” in economics. As you know, but other readers might ignore, in a zero sum game one player’s loss is the other player’s prize.
Now, I would like to make people aware that the “household” curve in your Australian Government and Household Debt (1976-2010) chart, could also be labeled “financial sector assets (part of)”. This follows from your statements: when you buy your home, you’re borrowing money (which is a liability for you) from Joe’s bank (as assets).
And, to gain some perspective, the 4 Pillars issued some 90% of the mortgages included in that curve. They have a lot of people grabbed by their “cojones”. Is that power or what?
But it is also a weakness: imagine mortgagors started to default… The 4 Pillars may end up with a lot of loose (and bloodied) “cojones” in their hands.
Is it a zero-sum game? If I define “debt” to mean “liabilities” sure but is it? If not and I am a super-fund I can buy an asset e.g. a bank bill. My debt has not decreased as I use up my cash reserves. The cash reserves of a fund are a liability (?) but are they classed as “debt”. The bank debt has increased of course. The bank might lend this money to a corporate which will increase the corporate’s debt but not decreases the bank’s debt. I am a bit confused on how this works though it looks like it should be straightforward.
In any event it would be interesting to break the non-household debt figure down into government, bank and non-bank commercial.
On reflection it is a zero-sum game if net debt = debt – cash reserves (savings). Intracompany if I reduce my debt by paying down I have to use up cash reserves or raise equity, effectively swapping debt for equity. That equity comes from reducing someone else’s cash reserves so increases their net debt by same amount or they can raise the cash by increasing their debt which has same effect ad infinitum. It was the debt-equity exchange I wasn’t sure of.
@ JamesGlover,
I’m not sure I follow your reasoning, for which I apologize: home buyers with a mortgage have a debt with the banks that issued the mortgage. For home buyers, the debt is a liability. The aggregate amount of debt is shown in the “household” curve of the chart.
For the banks that issued the mortgages, these mortgages become assets. Thus, the “household” curve denotes the aggregate amount of assets.
Clearly, banks don’t need to hold those assets: they can sell mortgage backed securities. But this is another story.
If I am missing your point (as I am ready to admit that is likely) please, let me know.
On second thoughts, there is something inaccurate in my first post:
“And, to gain some perspective, the 4 Pillars issued some 90% of the mortgages included in that curve”.
That’s not so: the 4 Pillars were responsible for about 90% of the mortgages issued LAST year. Before that, they issued smaller percentages. Overall, I would guesstimate their holdings somewhere between 60% and 90% of the total.
So globally there seems to be more and more debt. What would happen if Governments ganged together and said “sorry” you can all go to hell to the “Puppet Masters”, I mean where the hell does all this money come from apart from China? Is there a “money crop” somewhere that only the “Masters” have access to, sorry for my ignorance, but this simply does not add up if the answer is zero.
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